Paul Krugman and a host of others are making important and highly salutary points about budget deficit hysteria. Policy makers should listen to them. However, unless I’ve missed it, these critics have neglected to tackle a key part of this: why the CBO’s alternative baseline showing persistent structural deficits, is wrong. I fear that policy makers won’t listen to them anyway, but given the CBOs stature in these debates here in DC, I guarantee Krugman et al will be ignored unless they tackle this question (which isn’t hard to do). Believe me, “CBO says current policy will generate structural deficits” is a lot more convincing to the “serious people” around here than pretty much anything else.
As the figure below reveals, under this alternative scenario, the budget never achieves primary balance (deficit/GDP<3%) even as the economy is assumed to enter a normal growth path, i.e., structural budget deficits persist. What’s in this scenario? Full extension of the Bush tax cuts, AMT patch, doc fix, no sequester…all of which lead to higher deficits.
Obviously, that doesn’t prove the anti-hysteria crowd–of which I’m a card-carrying member–wrong. But they/we need to point out why the alternative scenario is wrong. Which of its policy assumptions are incorrect? How would they change them, and no hand waving allowed (I like to note, in this regard, that the Obama 2013 budget achieves primary balance by 2016, and during the cliff negotiations he’s largely been arguing for that policy set)? Does the CBO assume slower GDP growth than they do?
Like I said, closing the argument by addressing this part of it may well not move many policy makers. Their motivation for deficit hysteria is not fiscal rectitude—it’s bashing and shrinking government. But for those who speak the lingua franca of DC and CBO, it’s a critical piece of all this.
Source: CBO August Update